Tuesday, October 28, 2014

It's Starting: Russians and Chinese Are Ditching the US Dollar and Europeans Are Using Renminbi in Their Reserves

By Simon Black

At present, US dollar accounts for roughly 61% of the world's foreign exchange reserves.

It's still a safe bet for most, not because the currency is actually
strong, but because so many others are already so reliant on it.

Between those with reserves in and pegs to the US dollar, many countries
have given their allegiance, and now have a vested interest in the
health of the currency.

Due to this common interest, a sort of unofficial, involuntary alliance has been formed between them all.

Together, they’re all playing along, pretending that everything is fine.
If the dollar collapses, they're all screwed, so they've got to get
each other’s backs.

From the throne of the world’s reserve currency, the Federal Reserve,
with the power to print the US dollar, feels dangerously omnipotent.

They can get away with just about anything. For now.

The central bankers get to print dollars and spend them at current
prices, before the stuff hits the wider market and diminishes its
overall value.

And for the time being they don’t really face any consequences. The
whole world just absorbs it. Other countries really have no other
choice.

But they’re getting tired of putting up with this abuse,
and the unrest is growing. New alliances are being made, this time to
dethrone the dollar.

Just this week yet another currency swap agreement was made between the
Chinese and Russian central banks. This time for 150 billion renminbi.

Trade volume between China and Russia will reach $100 billion (600
billion renminbi) next year, and is expected to reach $200 billion in
2020. This latest currency swap agreement will greatly reduce the need
for dollars in their transactions.

Currently, 75% of trade between the two countries is settled in dollars.
When they signed the agreement for the bilateral currency swap, Russian
deputy Prime Ministers said this will “encourage companies from the two
countries to settle trade in local currencies and avoid the use of a
third country’s currency.”

Who do you think that was aimed at?

Threatened by the growing strength of China and Russia, the US is
actively working to vilify the two. Between the headlines of war, both
cyber and military, the government is unsubtly trying to bring back the
days of yellow peril and the red scare.

However, it can't use the same tactics on its longstanding ally—Europe.

Even the European Central Bank has started discussions on the
possibility of including the renminbi as one of its reserve currencies.

And the euro and the renminbi are already directly tradable as of this month.

On Tuesday the UK also became the first country besides China to issue a sovereign bond in renminbi.

This coincided with the issuing of 180 million renminbi of corporate
bonds by China’s ICBC in South Korea. Another first. South Korea is
firmly on the renminbi train as renminbi deposits in the country jumped
55-times in just one year.

It’s very clear where the trend is going. All these news items are
pieces of the same puzzle. The US dollar’s throne is shaking as it’s
losing its importance and status as the preeminent currency in the
world. Renminbi is on the way up.

The whole existing order of a single ruling currency is currently being challenged.

Correct. But the US holds the world reserve currency which allows their Central Bank (The Federal Reserve) to be the most indiscipline with the money printing i.e. they can print with only minimal effects on prices in the short term because their currency is so widely used and accepted; because the temptation is so great they go overboard until the currency gets destroyed as has happened in the past with other countries that once enjoyed world reserve currency status.

Sterling was once the reserve currency. Has the pound been destroyed? It has certainly depreciated. But it exists today, although it's no longer the primary reserve/trading currency.

All countries engage in some form of currency manipulation. Its fashionable nowadays. Switzerland, Japan, Russia, Great Britain, Canada, the Eurozone. Even Trinidad and Tobago. This is an era of the dirty float.

Currency base inflation is more a result of extravagant spending. One extravagance is empire building.

Nations that once held the reserve/trading currency were all expanding their empire : Portugal, Spain, Holland, France, and Great Britain. The history of Trinidad and Tobago reflects this. Colonial ownership of the islands shifted amongst empires in various stages of ascent or decline.

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About the Editor

The editor is a Kingdom believer, loving husband, father and business owner.

He attained a Bachelors in Finance and Economics at the University of Western Ontario in Canada.

After graduating he worked in the Canadian securities industry while residing in Burlington, Ontario, and has completed the Canadian Securities Course –the Canadian investment course that qualifies graduates to sell and deal in financial products in Canada.

He currently resides in Trinidad and makes his living in the T&T Energy Sector. Contact The Editor